A woman looks at an electronic stock board of a securities firm in Tokyo. / Koji Sasahara, AP

by By John Spence for USA TODAY, USA TODAY

by By John Spence for USA TODAY, USA TODAY

The resurgence of Japan's stock market is having a dramatic effect in the U.S., where the two largest ETFs for Japan have raked in nearly $10 billion of new cash this year as investors chase the stunning rally fueled by Prime Minister Shinzo Abe's mission to stoke inflation and revive the economy.

However, the two funds take different approaches to investing in Japanese stocks, resulting in a significant impact on their performance.

WisdomTree hedges its currency exposure to the Japanese yen, while iShares does not. This is a crucial difference. When the Japanese yen is weakening against the U.S. dollar, then WisdomTree will outperform. When the dollar is beating the yen, then iShares will lead.

Of course, WisdomTree's fund has been the relative winner so far this year with the Bank of Japan pulling out all the stops to weaken the yen and provide a tailwind for Japanese exporters. It also has helped out big investors such as billionaire Mark Cuban who have bet against the yen.

This year, WisdomTree is up 31% vs. 21% for iShares. CurrencyShares Japanese Yen Trust (FXY), a currency ETF designed to track the movement of the yen vs. the dollar, is down 12% in 2013 to its lowest level since 2008.

These are dramatic moves and the Nikkei 225 on Tuesday surged above 14,000 for the first time since the financial crisis from its recent low of around 8000 established in late 2011. The Japanese equity index has climbed to its highest level since 2008.

The policy known as "Abenomics" aims to reverse a generation of deflation and a sluggish economy that have plagued Japan and poisoned investors.

For example, the Nikkei topped out close to 39,000 in 1989 after a furious multiyear rally and one of the biggest financial bubbles in history. So Japan has been "dead money" for nearly a quarter-century while in the U.S. the Standard & Poor's 500 has recovered to a fresh record high after the 2008 financial crisis.

Whatever it takes

If new Bank of Japan Governor Haruhiko Kuroda has his way, the yen will fall even more.

Kuroda last month reiterated his pledge to do "whatever it takes" to meet the 2% inflation target as the central bank unveiled a plan to double its holdings of government bonds and ETFs the next two years.

The BOJ's bold measures have shown early returns by lighting a fire under Japanese stocks, while household spending in March grew at the fastest rate in nine years.

"In a way, the market can do a lot of the heavy lifting for the Bank of Japan by sending the yen's value lower and easing pressure on Japan's exporters. But the market must believe the BOJ will not back down," says Jeremy Schwartz, WisdomTree's director of research.

Schwartz says the BOJ is trying to manipulate its currency to drive down the yen and boost inflation, even if the central bank can't explicitly say it. The policy has had some success in terms of raising inflation expectations, driving consumption and lifting Japan's stock market. "It's self-reinforcing," he says.

Globally recognized security

For WisdomTree, DXJ has provided a huge boost. The company's shares, which trade on the Nasdaq, are up nearly 104% this year as Wall Street views the stock as a "pure play" for the growing $1.5 trillion U.S. ETF market.

The New York-based company also boasts an impressive pedigree in the executive suite including hedge fund legend Michael Steinardt, who is the company's chairman, and noted finance professor Jeremy Siegel, author of Stocks for the Long Run, is a senior investment strategy adviser. Chief Executive Jonathan Steinberg is the son of financier Saul Steinberg.

The runaway success of WisdomTree's fund and its unique strategy illustrate how the next round of growth in the ETF business could be driven by specialized, niche funds rather than the plain-vanilla index portfolios that currently dominate the industry.

"DXJ has become a globally recognized security," Steinberg said during the company's recent first-quarter earnings call. "Taken together, the success of DXJ reinforces WisdomTree's business model, its growth story, and also reinforces WisdomTree as an innovative and highly competitive firm within the ETF industry."

The company managed $28 billion of ETF assets as of May 1 and its market share is growing thanks in large part to the money pouring into DXJ.

The fund is a handy and liquid vehicle to approximate a trade that has been popular with institutional investors: go long Japanese stocks and short the yen. Jeffrey Gundlach, manager of the DoubleLine Total Return Bond fund, late last year said this was one of his favorite trades for 2013.

Billionaire investor Cuban has also gotten in on the action with a massive short bet against the yen that has been very profitable for the Dallas Mavericks owner.

For individual investors who want to position for more yen weakness and higher Japanese stocks, ETFs can be a much easier and simpler option.